Not every Deal of the Week is a strong buy. Some weeks, the most useful analysis is showing you what an average deal looks like — so you can calibrate your expectations and recognize when to hold out for something better.
This week: a 4-unit property in Denver's Capitol Hill neighborhood, listed at $875,000. It's not a bad property. It's not a bad price. But the numbers tell a story of a deal that's... fine. And "fine" doesn't build wealth.
The Property at a Glance
| Metric | Value | |--------|-------| | Address | 1442 N Downing St, Denver, CO | | Units | 4 (2x 2BR/1BA, 2x 1BR/1BA) | | Year Built | 1965 | | List Price | $875,000 | | Price Per Unit | $218,750 | | Current Gross Rent | $7,200/mo | | Occupancy | 100% |
Capitol Hill is one of Denver's most established rental neighborhoods — high walkability, strong transit access, consistent demand from young professionals and students. The location is genuinely excellent. The question is whether the numbers justify the price.
The Numbers: Income & Expenses
Current Income
The rent roll:
- 2x 2BR/1BA at $2,000/mo = $4,000
- 2x 1BR/1BA at $1,600/mo = $3,200
- Total Monthly Gross: $7,200
- Annual Gross: $86,400
With a 5% vacancy reserve (appropriate for Capitol Hill's tight submarket), effective gross income is $82,080.
Operating Expenses
| Expense | Monthly | Annual | % of Gross | |---------|---------|--------|------------| | Property Tax | $680 | $8,160 | 9.4% | | Insurance | $340 | $4,080 | 4.7% | | Management (8%) | $576 | $6,912 | 8.0% | | Maintenance & Repairs | $550 | $6,600 | 7.6% | | CapEx Reserve | $350 | $4,200 | 4.9% | | Utilities (common area) | $160 | $1,920 | 2.2% | | Admin & Legal | $80 | $960 | 1.1% | | Total Expenses | $2,736 | $32,832 | 38.0% |
The expense ratio is reasonable at 38% of gross. Colorado's property taxes are moderate compared to Texas, and insurance is manageable. The elevated CapEx reserve (4.9%) reflects the 1965 vintage — more on that below.
Net Operating Income
- NOI: $49,248/year
- NOI Margin: 57.0%
A 57% NOI margin is respectable — right in the middle of the institutional benchmark range of 55–65%. Nothing to complain about, nothing to celebrate.
Debt Service & Cash Flow
Modeled at 75% LTV, 6.95% rate, 30-year term:
| Metric | Value | |--------|-------| | Down Payment | $218,750 (25%) | | Loan Amount | $656,250 | | Monthly Payment | $4,338 | | Annual Debt Service | $52,056 |
Cash Flow
- Annual NOI: $49,248
- Annual Debt Service: $52,056
- Annual Cash Flow: -$2,808
- Monthly Cash Flow: -$234/mo
- Cash-on-Cash Return: -1.3%
- DSCR: 0.95x
The deal is slightly cash-flow negative at 75% LTV. At 70% LTV ($612,500 loan), monthly payment drops to $4,049, and the deal produces $576/year in positive cash flow — essentially breakeven.
This is the fundamental challenge with Denver small multifamily at current cap rates and interest rates. The spread between cap rates (5.6% on this deal) and mortgage rates (6.95%) is negative. You're paying more in debt service than the property generates in NOI. That negative leverage means every dollar you borrow makes your return worse, not better.
Why the Score Is 58/100
Let's be direct about what's dragging this deal down.
No Rent Gap
| Unit Type | Current Rent | Market Median | Gap | |-----------|-------------|---------------|-----| | 2BR/1BA | $2,000 | $1,975 | +1.3% | | 1BR/1BA | $1,600 | $1,580 | +1.3% |
The rents are actually slightly above market median. There is no value-add rent opportunity here. The current owner has been diligent about rent management — which is great for them, but it means you're buying a fully optimized income stream with no upside.
Negative Leverage
As noted above, the cap rate (5.6%) is below the mortgage rate (6.95%). This is a structural problem in many gateway markets right now. It means the deal only works with significant equity or if you're betting on rate declines.
1965 Vintage Risk
A 60-year-old building in Denver has specific capital expenditure concerns:
- Foundation: Denver's expansive clay soils are notorious for foundation movement. On a 1965 structure, you need a thorough foundation inspection. Remediation can run $15,000–$50,000+ depending on severity.
- Plumbing: Cast iron drain lines from this era are approaching end-of-life. Budget $8,000–$15,000 per stack for replacement.
- Electrical: 60-amp panels are common in 1960s construction. Upgrading to 100-amp service for modern tenant expectations runs $3,000–$5,000 per unit.
- Insulation: Minimal by modern standards. Energy costs are higher, and tenants notice.
The CapEx reserve of $4,200/year ($1,050/unit) is likely insufficient for a building this age. A more conservative estimate would be $1,500–$2,000/unit, adding $1,800–$3,800 to annual expenses and further eroding cash flow.
Limited Growth Catalyst
Denver's rent growth has moderated significantly from the 2021–2022 peak. Current estimates:
- 2026: 2.0–3.0%
- 2027: 2.5–3.5%
- 2028: 3.0–4.0%
These are healthy numbers, but they're not enough to transform a breakeven deal into a cash-flow generator within a reasonable timeframe. At 2.5% annual rent growth, this property doesn't produce meaningful positive cash flow (>$200/mo) until year 3 — assuming no major capital events.
Sensitivity Analysis
Interest Rate Sensitivity
| Rate | Monthly Payment (75% LTV) | Annual Cash Flow | |------|---------------------------|-----------------| | 5.95% (-1%) | $3,909 | $2,340 | | 6.95% (current) | $4,338 | -$2,808 | | 7.95% (+1%) | $4,791 | -$8,244 |
A 1% rate drop makes this a marginally positive deal. A 1% rate increase makes it actively painful. The deal is sensitive to rate movements in both directions.
Vacancy Sensitivity
On a 4-unit property, vacancy math is binary. One vacant unit for one month is a 2.1% annual vacancy rate. One vacant unit for two months is 4.2%. Losing a unit for 60 days doesn't sound like much, but on a deal that's already at breakeven, it swings cash flow by $3,600–$4,000.
Small unit counts mean small margins for error. This is an inherent characteristic of fourplexes, not a flaw in this specific deal — but it's worth acknowledging.
Freehold Score Breakdown: 58/100
| Sub-Score | Points | Out Of | |-----------|--------|--------| | Cash Flow Strength | 12 | 30 | | Market Positioning | 14 | 25 | | Risk Profile | 17 | 25 | | Growth Potential | 15 | 20 |
Cash Flow Strength (12/30): Negative cash flow at standard leverage. No rent gap to capture. The path to positive cash flow depends on rate cuts or time-based rent growth — neither of which you control. Low score reflects the math.
Market Positioning (14/25): Capitol Hill is an excellent location — walkable, transit-rich, consistent demand. But the price reflects that desirability. At $218,750/unit, you're paying a premium for location that the current rent roll doesn't support at today's rates.
Risk Profile (17/25): The 1965 vintage is the biggest risk factor. Foundation and plumbing concerns are real, not theoretical, for Denver buildings of this era. Moderate score reflects manageable but meaningful capital risk.
Growth Potential (15/20): Denver's long-term fundamentals are solid — diversified economy, population growth, limited land for new development in established neighborhoods like Capitol Hill. The growth is there, but it's priced in. You're not getting a discount on the future; you're paying today's prices for average future returns.
When Does a Deal Like This Make Sense?
Despite the middling score, there are scenarios where this property makes sense:
1031 exchange buyers who need to place capital and are optimizing for tax deferral rather than immediate cash flow. A stable, fully occupied 4-unit in a strong Denver submarket is a defensible exchange target.
Long-term holders who plan to own for 10+ years and prioritize equity buildup and appreciation over cash flow. Denver real estate has appreciated at 5.5% annually over the past 20 years. Over a 10-year hold, this property likely appreciates to $1.3M+, creating substantial equity even if cash flow remains modest.
All-cash or low-leverage buyers who can put down 40–50%, eliminating the negative leverage problem entirely. At 50% LTV, this deal generates $13,000+/year in positive cash flow.
For a leveraged operator seeking cash-flow-driven returns? Pass. There are better opportunities in Denver's suburbs (Lakewood, Aurora, Thornton) where price-per-unit is 20–30% lower and rent-to-price ratios are more favorable.
The Verdict
This is a fair deal — not a bad one. The property is well-maintained, fully occupied, in a strong location, and priced in line with market comps. The problem isn't the property. The problem is the market: Denver cap rates for small multifamily in desirable neighborhoods don't support positive cash flow at current interest rates with standard leverage.
If rates drop 75+ basis points, this deal improves meaningfully. If you're a cash buyer, it's a fine long-term hold. But for a leveraged operator looking for cash-flow-positive acquisitions, the numbers don't work today.
Freehold Score: 58/100 — Hold. Wait for better pricing or lower rates.
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